80. You were told on the 4 July from Equitable
that they raised this possibility.
(Sir Howard Davies) Yes.

81. And yet you find it is not until the 18
July, with two days to go before the ruling, that, according to
the Baird Report, there starts to be some discussion inside the
FSA about making a contingency plan in case it goes that way.
Is that a correct interpretation?
(Sir Howard Davies) There was a note to me and certainly
Michael Foot and I, who sit next to each other, discussed this
issue and there was corridor discussion about what we expected
the Equitable to do. The issue for us was in those circumstances
would we need to close the Society to new business, which was
what we believed would then be necessary. As it happened, the
Society had reached its own conclusion that it would put itself
up for sale. We also had to consider whether in those circumstances
we should close it to new business and we decided that we would
not do that because we believed that would damage the interests
of policyholders because the company was much more likely to achieve
a successful sale if it was sold as a going concern.

82. Can I just remind you finally of the Service
Level Agreement that exists between yourself and the Treasury
dating back to 1997? Paragraph 248 of that says that the FSA will
therefore pursue its supervisory objectives by aiming to minimise
the risk of failure by identifying early signs of trouble and
taking preventative action. Do you think you have lived up to
that in respect of Equitable Life?
(Sir Howard Davies) You may be surprised by this conclusion,
Mr Plaskitt, but I think we did. I think we did identifyor
technically speaking the Treasury identified (they are the same
people)back in 1998 that Equitable was in difficulty and
pursued a line in terms of the reserving for these guarantees
which was meant to anticipate if you like a ruling that they could
not do what they were aiming to do in terms of the bonuses and
that these guarantees actually had value. They had been attempting
to do that. My conclusion however is that by 1999 this was too
late. As the report said, by that time the die was cast and it
was not possible to generate the kind of reserves needed to cope
with the adverse judgment of the House of Lords acting only from
the beginning of 1999. That would have had to be done several
years before in the form of lower bonus policies and setting up
higher reserves to cope with the cost of guaranteed annuities.

83. But I am having difficulty understanding
how you can feel that you have lived up to this because it is
also around identifying early signs of trouble. We have seen in
the Baird Report several instances where those early signs were
sent to you and on one of them, as you have already said, you
took no action.
(Sir Howard Davies) I do not think there was any useful
action to be taken. I would come back to the conclusion that in
spite of all the steps that we took, particularly on the reserves,
it was not possible at that stage for a society which had been
operated for many years with a very low level of reserves and
which had launched a court case to do anything materially to affect
the eventual outcome. Clearly there were some examples in this
case and I completely acknowledge that there are examples in this
report of management and administration which one would like to
have done better on and indeed that is why we have set all this
out and why we have made a lot of changes, but I do not think
that they add up to a conclusion that we could have done something
to prevent the eventual outcome which we did not do, and I do
not think that conclusion is in the report.

Chairman

84. Sir Howard, as you know, the evidence session
was from 10.30 until a quarter to 12 and we have run out of time
with an extensive number of questions. We would be pleased if
at some later stage you could return and we could continue this
evidence session. Thank you very much. Before you leave, the last
Committee inquiry was concerned about a number of issues and one
of the members is interested in asking Martin Roberts to come
back along with you. I think it was Mr Cousins. Perhaps you could
give consideration to that for the next session.
(Sir Howard Davies) Certainly.